"The social system of private property and limited government is the only system that tends to debarbarize all those who have the innate capacity to acquire personal culture."
~Ludwig von Mises

Apr 1, 2008

Doug French on a Bill Bonner speech: "Mathematical modeling is based upon conceit and pretension"

Bill Bonner provided a clear analysis of how the current crisis was engendered in his speech played for the [Doug] Casey faithful during the Wednesday night banquet. When Richard Nixon closed the gold window, the US dollar was then "based upon a fraud," and with central bankers being human, from that point the dollar would be made worthless. The next villain in Bonner’s story is Eugene Fama, who formulated the "Efficient Market Hypothesis," or in other words, the market knows everything, prices just move randomly. Since Professor Fama’s work was published, securities prices became natural phenomena that are supposedly not influenced by human behavior. Thus, stock and bond price movements could be mathematically modeled, and that risk isn’t risk anymore, but volatility.

From this thinking came the derivatives industry that is based upon models devised on historical market statistics during time frames that didn’t include a fiat currency regime, let alone the presence of $500 trillion in derivatives. This mathematical modeling is based upon conceit and pretension, according to Bonner, and the turning of Level 3 assets into AAA-rated paper were "miracles that would stagger Jesus Christ."